Question

1.1 Explain THREE (3) major goals of financial management.

1.2 In establishing a sound credit policy, decisions should be taken on at least FIVE (5) factors. Name and explain these factors.

1.3 Discuss debentures as a form of long-term financing for a company.

Answer 1

1.1 The goals of financial management are given below:

1. Profit maximization

The main and most important goal of financial management is to maximize the profits.

Whether long term or short term, a manager always tries to maximize the profits of the organisation as it implies the efficiency of any business. The main reason a business exists is so that the owner can earn from it. This is why maximization of profit is the primary goal. This can be done if the finance manager is actively taking proper financial decisions and providing true picture to the management.

2. Wealth maximization

Wealth maximization (shareholders’ value maximization) is also a main objective of financial management. Wealth maximization means to earn maximum wealth for the shareholders. So, the finance manager tries to give a maximum dividend to the shareholders. He also tries to increase the market value of the shares. The market value of the shares is directly related to the performance of the company. Better the performance, higher is the market value of shares and vice-versa. So, the finance manager must try to maximize shareholder’s value

3. Proper estimation of total financial requirements

Proper estimation of financial requirements is very important as the company can stay prepared for any major or minor inflow or outflow of cash. This is possible if proper financial statements are prepared on time and decisions are taken based on that. The job does not end at estimating the financial requirements. There requirements are then characterized based on their nature. For example if they are long term, short term, fixed capital or working capital. If the estimation is not done properly I will lead to either shortage or surplus of finance, both of which are a cost to the company.

1.2 Factors influnecing Credit Policy are:

• Competitors:

Credit policy is usually influenced by the credit practices being followed in the industry. The credit policy of competitors plays a very important role in deciding the credit availability. A company with good credit policy will stand out .

• Customer Type:

The type of customer has a direct influence on the credit policy. If the customer line of business is characterized by a small amount of capital. Then the policy needs to be a little lineant.

• Merchandise:

The types of goods that is being sold also plays an important role in determining the credit policy. For instance, if shelf life of the product is short, the credit policy will be for a shorter period and more restrictive than those when the goods have a long shelf life, or are easily returnable, etc.

• Profit Margin:

Markup on a product is very important. If the markup is small the policy has to be very restrictive as the credit department does not want to miss out on the markup and so are very careful in selecting its accounts.

• Unit Price:

When the unit price is low, it is easier to use one single credit policy which is liberal for all the customers. However, as the unit price tends to increase the credit policy starts to change as per the needs. For high end expensive products where unit price is very high, the credit policy gets very restrictive.

1.3

Debentures are a form of long-term financing instrument that enables a business to raise capital without diluting its ownership. These are best for the company who are sure of their future revenues and profits. It act as a loan to the company and in case of liquidation needs to be paid. an interest is paid on these debentures by the company which act as an expense for the company. This is an amazing instrument for raising huge capital without compromising on the company's ownership.